Allied Esports Entertainment Inc. (AESE) on Q2 2021 Results - Earnings Call Transcript
Operator: Thank you for standing by. This is the conference operator. Welcome to the Allied Esports Entertainment Second Quarter 2021 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Lasse Glassen, Investor Relations. Please go ahead.
Lasse Glassen: Thank you, operator. Good afternoon, and welcome to the Allied Esports Entertainment's 2021 second quarter results conference call. Speaking on the call today is Allied Esports Entertainment's Chief Executive Officer, Claire Wu; and Chief Financial Officer, Tony Hung. Jud Hannigan, who is leading the Allied Esports Operations is also available for the question-and-answer session. Before I turn the call over to management, please remember that our prepared remarks and responses to questions may contain forward-looking statements. Words such as may, will, expect, intend, plan, believe, seek, could, estimate, judgment, targeting, should, anticipate, goal and variations of these words and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those implied by such forward-looking statements, due to a variety of factors discussed in the Company's public filings, including the risk factors discussed in documents filed with the Securities and Exchange Commission. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurances that the expectations will be attained. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, certain of the financial information presented in this call represents non-GAAP financial measures. The Company's earnings release, which was issued this afternoon and is available on the Company's website presents definitions of such non-GAAP financial measures, reconciliations to the appropriate GAAP measure and an explanation of why the Company believes such non-GAAP financial measures are useful to investors. With that, it's now my pleasure to turn the call over to Allied Esports Entertainment's CEO, Claire Wu. Claire?
Claire Wu: Thank you, Lasse, and thank you, everyone for joining us this afternoon. I will begin by discussing the recent leadership transition at AESE, and then an overview of the key operating highlights from this past quarter. In addition, I will provide an update on the company's strategies as our Board of Directors and the management team evaluate the future exciting path. Tony Hung our Chief Financial Officer will follow with additional details on our second quarter financial performance. Similar to recent quarters, the financials we are reporting today pertain to our continuing operations, which includes our Allied Esports operations under the corporate TopCo expenses. As previously announced, we completed the sale of the World Poker Tour or WPT to Element Partners earlier in the third quarter, and therefore the WPT results are presented as discontinued operations for the three and a six month period ended June 30, as well as the comparable periods for the prior year. Having been appointed to the role of CEO, President and General Counsel of AESE just about five weeks ago, I'm very honored to lead the day to day operations of the company. For those of you who are not familiar with my background, I believe more than 15-years of relevant experience to AESE. Most of this is may as Vice President, and the General Counsel for Asia Pacific Capital, Inc., as well as Senior Counsel at the New York law firm Davidoff Hutcher & Citron. In addition, prior to accepting the CEO, President and the General Counsel positions, I served and will continue to serve as the Director of AESE Board. Throughout my career, I have had extensive legal and business experience in cross-border transactions, U.S. securities regulations, mergers and acquisitions, capital market transactions as well as corporate strategic planning and restructuring. I believe this will serve the company well as we look ahead to the future and to track the course for AESE going forward. On behalf of the entire team, I'd also like to express our thanks and gratitude to Frank Ng who led the company since it became publicly traded two years ago, and helped AESE navigate the complexities of the COVID-19 pandemic. We wish him all the best at his future pursuit. With that, let's move on to an overview of our results for the second quarter of 2021. Overall, I'm pleased with the steady progress of our Esports business, as demonstrated by the 65% quarter-over-quarter growth in revenue. This growth was driven by the gradual recovery of the in-person pillar of our Esports business as we slowly emerged from the COVID-19 pandemic, and continue to benefit from increased foot traffic in Las Vegas and the return of live events and social gatherings. In addition, during the second quarter, we saw the early revenue contributions from our Multiplatform Content pillar. While the resumption of in-person events will be an important growth driver of our Esports revenue in the near term, we have also made good progress over the last several quarters building-out capabilities within our Multiplatform Content pillar. During the quarter, we announced the launch of AE Studios, which will serve as the original content development, storytelling and production services arm for partners of Allied Esports. I will provide additional details on this important initiative later in my remarks. And finally, that's subsequent to quarter end, we completed the sale of WPT to Element Partners in an all-cash transaction for $105 million. The sale of WPT is a key milestone as it significantly improves our liquidity position. With over $100 million of cash today, we have significant financial flexibility as we look to maximize shareholder value through the utilization of our cash and concluding our strategic exploratory process for our Esports business. Now, let's turn to our second quarter operational highlights for our Esports business. We saw the start of the COVID-19 pandemic of recovery in the second quarter, as cautionary restrictions were lifted in Las Vegas on June 1. This resulted in increased demand for our tournament and production services, and net to Allied Esports production of 81 events in the second quarter, an increase of 137% comparing to the prior quarter, including 38 proprietary events and the 43 third-party online and in-person production. Between in arena and online third-party tournament production, over 14,200 players competed in Allied Esports projected tournament in the second quarter of 2021, as compared to approximately 1,700 players in the third quarter. Proprietary productions at the HyperX Esports Arena Las Vegas were up 23% from the prior quarter, with the company adding Lockdown , a new fighting game competition to its weekly schedule, which continues to draw players from all around the United States. In April, the company also hosted a new edition of its Legend Series tournament, which was the world's first the Esport tournament production, tutorial live animated commentators in a partnership with motion capture technology leader Xsens. The event deployed a three day four teams, winner take all format that included wagering opportunities for better. During the quarter, we announced the ViewSonic as the official gaming monitor and the streamer room partner of HyperX Esports Arena Las Vegas. As part of this partnership, all players in arena and on the Allied Esports Truck in North America have the opportunity to play on ViewSonic’s indexed brand of gaming monitor. Additionally, the company partnered with Esports and content creation organizations 80-60 Esports on sponsor activations with Zest potato chips and other brand data snacks around in our Esports in arena programming Lockdown and Saturday Night Speedway. Third-party events increased nearly 15 fold quarter-over-quarter. The significant increase was driven by our new tournament organization partnership with Tencent backed streaming platform Trovo, for whom Esports will produce over 100 tournaments across North America, Europe and Latin America throughout 2021. In addition, prior to the lifting of in-person restrictions in early June, the HyperX Esports Arena continue to serve as a COVID-19 safe bubble environment for FaceIT production of the Rainbow Six North America connect, as well as the host of the Zombies World Championship. Although the company's more expansion plans with the Simon Properties, and the Brookfield Property Partners continue to remain on hold. The Allied Esports track will continue to bring gaming activations to fans around the country. To this end, we recently announced a Seven Stop Esports Truck Tour with NASCAR locked off a working green New York earlier this month, and we'll be making stops at Daytona International Speedway, Talladega Superspeedway, Michigan International Speedway, Kansas Speedway, and the Civic Raceway throughout the rest of the summer and into the fall. Throughout the pandemic Allied Esports have made this a definitive strategy to advance the company's Multiplatform Content pillar. A foundational effort of this effort was our 24 hour content strategy on Twitch, which saw 4.5 million live events in the second quarter alone and increased the followers by 28% from the previous quarter. Altogether, the company has delivered over 13 million live events on its Twitch channel sales lunching the 24 hour strategy in November 2020. As I highlighted at the beginning of our call, we announced the AE Studios during the second quarter. This new division of the company will serve as the original content development, storytelling and the production services arm of Allied Esports for partners looking for a turnkey solution outside of Esports tournament operations and the broadcast. Through AE Studios, we will leverage our years with digital content creation and the world class production facilities to design and produce digital first project for clients and the partners, spanning a variety of industries, such as gaming, entertainment, pop culture, music and the spot. AE Studios have hit the ground running with the production of our 24 Expo series of celebratory showdown for Twitch. The interactive content series feature the celebrities competing in studio and had to have on the virtual versions of some of the top golf course in the world. Concurrently, streamers participated from home on the desktop version of the game. The shows the second season kicks off on August 24 on Twitch.tv/TwitchSports. Distribution of our growing content library, which concurrently hold over 600 hours of Esports programming, continue to see strong demand and is now live on seven over the top or OTT streaming platforms through a distribution agreement, we have announced with MuxIP to distribute our Esports content around the world. We believe this is the beginning of additional distribution opportunities for our content library, and will see over 250 hours of our Esports tournament content air on those platforms. Before I turn it over to Tony to discuss our second quarter financials in more details, I would like to also provide a quick update on the company's longer-term strategies for our Esports operations. The rapid growth and the popularity of gaming and Esports during the COVID-19 pandemic has driven significant interest in Esports. With the WPT sale complete, we have begun to accelerate our progress along the plan to explore strategic options for the East Coast business, including a possible sale in order to maximize the shareholder value. As part of the process, we are actively working with Lake Street Capital Markets Advisor. With that said, no definitive buyer has been identified to purchase the Esports business, and there are no active negotiations yet irrespective to the sale of the Esports business. In the meantime, we will continue to operate the Esports business and execute our business plan. On a pro forma basis, including process from the WPT sale our cash position led of outstanding debt totals $101 million. With this cash along with any cash that may become available as a result of any sale of the Esports business in the future, we intend to explore opportunities to acquire or merge with our existing business. This includes a business in online entertainment, real money gaming, and other gaming sectors. However, the company does not plan to limit itself to any particular industry, or geographic location in its efforts to identify a prospective target business. Key criteria for a potential capital business includes a proven business model and experienced management team and accretion to the company's adjusted EBITDA. The company expects to engage with the rest of the band to assist in this process. However, I do want to make it clear that at the present, we do not have any specific merger, asset acquisition, reorganization or other business combinations under consideration or contemplation. We will provide you with an update on our progress with respect to this pursuit on future calls. That concludes my prepared remarks. And at this time, I'd like to turn the call over to Tony Hung, our CFO for an update on our second quarter financial results. Tony?
Tony Hung: Thank you, Claire. Good afternoon, everyone, and thank you for joining us today. While the pandemic continues to impact our business in the second quarter, we saw the beginning of recovery as cautionary restrictions were lifted in June in Las Vegas, and economies across the country began to reopen. Demand for our tournament and production services also increased and Allied Esports experienced meaningful improvements this quarter. In addition, we've continued to make progress on the development of our Multiplatform Content pillar and announced a new division of the company AE Studios during the quarter. Momentum is building and Allied Esports is well-positioned to continue driving improved results in the second-half of the year. Now, let's turn to our second quarter results from continuing operations. Total revenues for the second quarter increased 32.9% to $0.8 million compared to the second quarter of 2020. Looking at these results in greater detail, in-person revenues for the second quarter increased 8.1% to $0.7 million, compared to $0.6 million in the second quarter of 2020. As a result of the increased number of events, and loosened restrictions of operating hours and social distancing measures at our HyperX Esports Arena Las Vegas. The increase in in-person revenues were partially offset by a decrease in sponsorship revenue due to a lack of in-person activation and truck events in Europe, where the lingering effects of the COVID-19 pandemic remain a concern. Our Multiplatform Content pillar generated $0.2 million in revenues for the second quarter, driven by our new tournament organization partnership with Trovo, the Tencent backed streaming platform. Total costs and expenses for the second quarter were $5.0 million down from $5.3 million compared to the prior year period. The year-over-year decrease was primarily the result of the one-time impairment charge of $1.1 million against our investment in ESA, during the second quarter of 2020. This decrease was partially offset by several factors. First, in-person pillar costs and expenses increased by 29.2%, and selling and marketing expenses increased by 50% compared to the prior year period, as the recovery of live in-person events grew. Second, general and administrative expenses increased by 25% as compared to the second quarter of 2020. This year-over-year increase was primarily due to salaries returning to original levels in 2021, versus temporary lower salaries in the second quarter of 2020, in reaction to the COVID pandemic, as well as increases in legal and professional fees incurred this past quarter in connection with the sale of WPT. We continue to prioritize expense management and actively reduce all non-essential spending across all of our costs and expense items. Adjusted EBITDA for the second quarter was a loss of $3.0 million, compared to a loss of $2.2 million in the prior year period. Net loss from continuing operations for the second quarter was $4.3 million, compared to a net loss of $10.7 million in the second quarter of 2020. The year-over-year improvement was primarily a result of a one-time non-cash conversion inducement expense of $5.2 million from our debt refinancing that occurred in the prior year period. Now, moving to our balance sheet, at June 30 2021, our cash position totaled $16.8 million, including $5.0 million of restricted cash and $4.1 million of cash in connection with the WPT business and included in current assets held for sale, but which was available to fund the Allied Esports business until the closing of the WPT sale transaction on July 12, 2021. This compares to our total cash position of $14.2 million at June 30, 2020, which included $5 million of restricted cash and $7.4 million of cash held at WPT. As of June 30, 2021, we had convertible debt and bridge notes totaling $3.4 million in gross principle, which was paid off concurrent with the closing of the WPT sale. We continue to see progress in our Esports business. Our in-person pillar is gaining traction and we are excited to see more activity and events booked for the remainder of the year, as we slowly emerge from the pandemic. We also continue to strengthen our offerings in our Multiplatform Content pillar, while judiciously managing our costs and expenses. The significant cash received from the sale of WPT also strengthens our liquidity position to explore strategic options for the Esports business and maximize shareholder value. While we are not yet in the clear from the effects of the pandemic, the recovery is certainly underway and we expect our business to continue to improve in the second-half of the year. That concludes our prepared remarks, and we would now like to open the lines to Q&A. Operator?
Operator: Thank you. We will now begin the question-and-answer session. The first question comes from Derek Soderberg with Colliers Securities. Please go ahead.
Unidentified Analyst: Hi, this is Ryan on for Derek, thank you for taking my questions. I wonder if you can provide some more detail on the M&A environment out there and how you're prioritizing using the cash. Business environment favorable at the moment to find growing and profitable companies at a reasonable price. Can you maybe describe your ideal target? And is the company in real money gaming, content producing or any more detail on that would be great?
Claire Wu: Hi, Derek. Thank you for the question. Yes, with 100 million cash from the WPT deal, we intend to explore many M&A opportunities with this business. And like you mentioned that includes business in online entertainment, real money gaming, and other gaming sectors. With that being said, apparently the company does not plan to limit itself to any particular industry or location in its efforts to identify possible potential business. And Tony, do you have anything to add to that topic?
Tony Hung: Yeah. No, Ryan, I think, as you've probably been following the market obviously has been pretty active for M&A, and I think that's something that we're watching very carefully. And as Claire described, I think the good thing is that we have a pretty broad mandate in terms of looking at M&A activities. So we're not kind of boxed in to have to do a particular deal under a particular timeframe, and then have to do it under poor economic deal terms. So I think that gives us a lot more flexibility to be able to find the right deal that's going to maximize shareholder value.
Unidentified Analyst: Yeah. Thank you. And as a follow-up, I'm wondering if you could help us understand your expectations for what cash burn are, and where we should be modeling OpEx for the rest of the year? Thank you.
Tony Hung: Hey, Claire do you want me to go ahead with that?
Claire Wu: Regarding the – I can answer first and then I’m going to turn to you for details. Regarding the cash burn of Esports business, currently our strategy will be continue to grow revenues, while at the same time to reduce expense and become a more efficient company. In terms of a revenue growth, this is the in-person revenue bumping back. And we are very excited about the growth of our Multiplatform Content pillar. As far as the improve efficiency side, as the new CEO of the company, I'm leading the team to take a fresh look at all costs and expense, as well as the elements of our business of which are most profitable. And now, let me turn this to Tony to add more details.
Tony Hung: Yeah. And Ryan, I guess, just to kind of follow-up on what Claire said, I would say for the short-term, as you've kind of seen from our earnings release, probably, historically, we've been burning somewhere around $800,000 to a $1 million a month between the kind of Esports business as well as our corporate TopCo expenses. And so for the short-term going forward, I would expect that to be kind of a nice placeholder. But as Claire mentioned, obviously, we're going to be looking at new revenue opportunities, and also, potential ways to have identify more operational efficiencies to kind of help bring that down over time.
Unidentified Analyst: Thank you very much.
Tony Hung: Sure.
Operator: This concludes the question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Claire Wu: Thank you for your support and for joining us on today's call. We look forward to speaking with you again, when we report our 2021 third quarter in November. Thank you again for your time and attention this afternoon. And please stay safe and healthy.
Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
